Microfinance

[The first of these letters was printed in the Phnom Penh Post in September or October 2005. It produced a response from one Tom von Weissenberg, to which the second letter is a rebuttal. I don’t recall whether the second letter was printed.]

‘Role Model’ Bank

Your article about the Acleda Bank (“World Bank-IFC To Honor Acleda as ‘Role Model’”, September 23) quotes In Channy as saying that his bank charges 48 percent annual interest on small loans.

In ordinary English, this suggests that a borrower receives, say, $100, and at the end of one year pays $148 to the bank. That would be 48 percent simple interest.

However, Acleda loans (and most other small loans in Cambodia) are not repaid in this fashion. The borrower is charged a monthly interest rate and makes interest payments monthly. Acleda’s rate of 4% a month means that the borrower of $100 has the use of the full $100 for only one month; he or she returns $4 to the bank at the end of each month and therefore has the use of only $96 for the second month, $92 for the third month and so on.

By the start of the 12th month, the borrower has returned $44 and thus has the use of only $56 for the final month of the loan.

Over the course of the year, the real amount of the loan has been, not $100, but the average of the starting and finishing amounts, namely $100 + $56 divided by two, or $78. The real simple interest rate is therefore $48 divided by $78, or 61.5%. (In the past, Acleda sometimes charged 5% a month, which works out to almost 83% a year in simple interest.)

Freedom from corruption is certainly commendable, but it does not, by itself, produce any income. Usury seems to have far more to do with Acleda’s rise from a simple NGO to a multimillion dollar commercial bank. This casts a rather different light on its “incorruptibility”, which is more than just refusing to give or receive bribes.

Most NGOs enter Cambodian villages with the message, “We are here to help.” Did Acleda, in the interest of transparency, proclaim, “We are here to accumulate profits and become a bank.”?

That, after all, is what happened, and not by accident. The hard-earned riels of poor villagers paying interest of 61.5% or 83% are the source of Acleda’s wealth.

One would like to know exactly how the transfer of those funds to Acleda “benefited” the poor people who lost them. That is not the sort of question that has ever troubled the World Bank. But Cambodians should take note of what the WB considers “model” behavior.

Microcredit and the Philosophers’ Stone

Tom von Weissenberg (letter, October 3) challenges my calculation that a 4 percent monthly interest payment is the equivalent of an annual simple interest rate of 61.5 percent. He says I “forget” that the borrower should use his loan in order to make more money. He forgets that the use made of a loan has nothing to do with calculating the interest rate.

Even stranger is Weissenberg’s apparent belief that he has found the philosophers’ stone, which the alchemists thought would turn other substances into gold.

He assures us that $100 in microcredit provided to a villager will, in the course of a year, allow the family to spend $432 on their consumption ($36 a month for 12 months), and finish the year with a capital of $340. Furthermore, his villager has been able to pay $48 in interest, plus monthly expenses of $15, or $180 over the course of the year.

Add it all up, and it turns out that microfinance has transformed $100 into exactly $1,000. Moreover, Weissenberg assures us that there are 300,000 Cambodian families enjoying this magical expansion of wealth. In total, then, every year microfinance institutions transmute $30 million into $300 million for the benefit of poor Cambodians.

Clearly, we have microfinance to thank for the fact that there is no longer any poverty in Cambodia!

In the real world, things don’t work that way. The vast majority of borrowers in Cambodia have no chance at all of following the business course that Weissenberg recommends.

For example, a 1998 CDRI study, quoted in the 2004 UNDP publication, The Macroeconomics of Poverty Reduction in Cambodia, found that 90 percent of “very poor” borrowers and 78 percent of “poor” borrowers used their loans to buy rice or pay for medical treatment. Indeed, even 20 percent of “well-off” borrowers used their loans for those purposes.

Weissenberg says that the only “alternative” to microcredit is “usurers”. But lenders who charge 4 percent interest a month are engaging in usury, not providing an alternative to it.

Their rates may be lower than those of traditional village moneylenders, but their conditions are usually much harsher, which is why villagers often decide to stick with the devil they know.

And most of the time, the relationship between microfinance bodies and village moneylenders is not competitive but symbiotic. The Womyn’s Agenda for Change has been interviewing rural villagers in five provinces about their daily lives, including questions of debt. Over and over, they have been told of farmers who borrow from a microcredit NGO and then, when they cannot repay the principal, avoid forfeiting their land, if only for a short time, by borrowing from a village moneylender in order to repay the NGO. There are even quite a few instances of multiple borrowings: first from the NGO, then from the moneylender to pay the NGO, then from the same or a different NGO to pay the moneylender, then from the moneylender again—with the borrower usually deeper in debt each time.

WAC even found cases where a village moneylender was borrowing money from a microcredit institution at 4 or 5 percent a month and lending it to villagers at 12 or 15 percent a month. That is a real way to convert $100 of microfinance into $1,000, and it bears no relationship to Weissenberg’s picture.

Finally, I did not say that the World Bank was “foolish” about microfinance usury. I said it was complicit.